The Investment Thesis For JPMorgan Chase: UBS Analysis

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The Investment Thesis For JPMorgan Chase: UBS Analysis
Joe Mabel [CC BY-SA 3.0], via Wikimedia Commons

A news item today in the NYT says JPMorgan Chase & Co (NYSE:JPM) is in the midst of multi-billion dollar negotiation with various governmental agencies to settle litigation arising from mortgage securities that it sold in the years preceding the great financial crisis.

The Investment Thesis For JPMorgan Chase: UBS Analysis

A settlement figure of between $3B to $7B is being bandied about, but this is in a state of flux.

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Yet, notwithstanding all the bad news, JPMorgan Chase & Co (NYSE:JPM) is one of the top performing financial stocks today, up 1.76 percent to $51.21 at the time of writing.

In this context, it might be useful to take a look at UBS AG (NYSE:UBS)’s investment thesis for JPMorgan presented in their compendium for financials by analyst Brennan Hawken, CPA.

(Get insight from a previous article on JPMorgan Chase & Co (NYSE:JPM)’s legal troubles from its Warranties WMI Holdings Corp (OTCMKTS:WAMUQ) purchase here. Also refer to Morgan Stanley (NYSE:MS)’s Q3 view on major banks here).

JPMorgan’s business strengths

JPMorgan Chase & Co (NYSE:JPM) is the largest bank in the U.S. and has $2.4T in assets. With 5,600 branches and 18,000 ATMS, it operates across 23 states. It operates in all major capital markets and the entire gamut of investment banking services. It is one of the largest card issuers in the country.

Industry situation

Markets have stabilized, costs have been controlled, NIMs have steadied and rising rates are likely to boost returns. Valuations have already improved, but there is “additional upside potential for firms with a solid earnings track record.”

Investment rationale

JPMorgan Chase & Co (NYSE:JPM)’s ‘broad scale and strength’ will enable it to enhance its banking market share, and it is capable enough to function efficiently in a difficult regulatory and revenue environment. UBS AG (NYSE:UBS) feel JPMorgan will achieve the required capital adequacy by year-end, and this could bolster returns next year. According to UBS, “while a number of pending regulatory investigations could drive elevated headline risk, we do not expect these issues will impair the firm’s long term earnings power.”

Tailwinds

Increased capital market activity, risk-on appetite, NIM expansion and operating leverage in an improving revenue environment are factors that could help the bank generate EPS of $7.25 in 2014.

Headwinds

However, in the event of a weak economy, JPMorgan Chase & Co (NYSE:JPM) would likely see contracting NIM and low capital market revenues. In this case 2014 EPS could be restricted to $4.85.

Valuation

Implied valuation is $75 on the basis of 1.6X YE14 TBV estimate, in the best case scenario. The downside valuation would be $49 on the basis of 1.1X YE14 TBV estimate.

Recommendation

UBS AG (NYSE:UBS) recommend a buy rating on JPMorgan Chase & Co (NYSE:JPM) and have a 12-month target of $62.

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